The Bay Area is known worldwide for a multitude of things, including being the hub of technological advancements, cultural diversity, and championship sports teams. One of the more recent phenomena however doesn’t have to do with any of those things. Currently, two Bay Area cities claim two of the top three spots for the costliest housing markets in the U.S. and Canada. San Francisco is the costliest, with a median home price listed at $1,085,000. Not far behind that is San Jose, ranking third with a median home price of $700,000.

This substantial rise in the cost of purchasing a home in the Bay Area has made the dream of buying a home an unrealistic fantasy for many residents. Despite the economy being in a stage of recovery, and the workforce growing, employees are simply not making enough to meet the steep financial demands of homeownership. The rise in the median price has led to a significant shortage of affordable housing, forcing a large percentage of residents to rent or to commute long distances to work.

In an effort to combat the effects of rising housing prices, the City of San Jose passed an ordinance that requires residential developments to designate 15 percent of homes as affordable housing when the development consists of 20 or more units. The ordinance requires that 15 percent of the development has to be built to be sold at below-market prices. These prices are determined by the City for buyers with qualifying income levels. Should the development wish not to participate, they would have to pay into a city housing fund. Developments that satisfy this requirement will receive economic incentives, including a density bonus, reduction in parking and set-back requirements, and financial subsidies and assistance from the city.

In order to qualify, your household earnings cannot amount to more than 120 percent of the area median income for Santa Clara County. The City of San Jose’s website has a chart designating their income and rent limits, and can be found at www.sanjoseca.gov. For an example, a household consisting of two individuals who make $114,800 or less, would qualify for a 2 bedroom unit under the ordinance.

This ordinance is intended to alleviate the shortage in affordable housing and allow lower income families to become homeowners in the San Jose area, a situation that has been unattainable for most during the last couple of years. Some of you may wonder what would stop people that qualify from buying one of these lower income units and reselling at market value, diminishing the intention of the ordinance. Legislators anticipated this loophole and drafted the ordinance with regulations that require that the unit remain affordable. All transfer documents, agreements, promissory notes, and etc. must be recorded on the chain of title subject to the ordinance.

San Jose’s Inclusionary Housing ordinance has not been met with open arms despite it being an effective tool in mitigating the shortage of affordable housing in the area. Many claim that this ordinance will cause alternate housing prices to rise, causing a chill in housing development due to these newly enforced regulations. One of the leaders of the resistance is the California Building Industry Association (CBIA). CBIA brought suit against the City of San Jose in 2010, challenging the constitutionality of the ordinance, claiming that the city’s ordinance should be reviewed under a heightened level of scrutiny. The City argued that the ordinance was within their police power to enforce land-use regulations and that they had met the deferential standard required under such. The trial court ruled in favor of CBIA, determining that the ordinance was unconstitutional, rejecting the City’s argument.

On appeal, the trial court’s ruling was reversed, and the appellate court’s ruling was later affirmed by the California Supreme Court. Both courts ruled that the ordinance is within the City’s police power and deemed that the ordinance is constitutional. Further illustrating the importance of this ordinance, the CBIA petitioned to have the case reviewed by the United States Supreme Court. On February 29, 2016, the U.S. Supreme Court declined to hear a challenge to the law and upheld the lower courts’ ruling.

Considering the current climate of the real estate market, this is one of the most important and city-friendly rulings in providing relief for the current lack of affordable housing. The ordinance has a major impact, not only on San Jose, but all over the Bay Area. This ruling could encourage neighboring cities to adopt a similar ordinance and cause a widespread change in the housing development world. Stay tuned to see how developers and potential purchasers adjust to this precedent set by the Supreme Court.

(California Building Industry Assn v. City of San Jose (2013) 216 Cal.App.4th 1373)

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